How should This Week's MPC Minutes be Interpreted?

Posted on 26 May 2007 by Ray Boulger

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Following this week's publication of the minutes of May's Monetary Policy Committee (MPC) meeting the market immediately racheted up its expectations on rate rises, with more economists now forecasting Bank Rate will reach 6%. This increased hawkishness is primarily because the minutes stated that “for some members, the question was whether Bank Rate should be increased by 25 basis points or whether there was a case for a rise of 50 basis points”.

Over the last week swap rates have increased by 0.1% and as a result we are seeing further fixed rate mortgage increases, mostly of around 0.1% - 0.15%. Halifax, Cheltenham & Gloucester / Lloyds TSB Scotland and Skipton have all announced that some or all of their current fixed rates will close on Tuesday 29 May and Northern Rock will increase all of its fixed rates by 0.1% on Monday 4 June.

Despite the market reaction to the news that the MPC discussed increasing Bank Rate by 0.5% it would have very surprising if the committee had not discussed this, as such a move had been suggested in some quarters, even though it was very much a minority view.  I think the more important point to take from these minutes is the fact that no member actually voted for a 0.5% increase and that the decision to increase Bank Rate by 0.25% to 5.5% was unanimous.

The overall tone of the minutes certainly suggests an increased likelihood of another rate rise to 5.75%. However after 4 increases in 10 months I believe the MPC will want to allow time to see the extent to which the increases we have already had impact on the economy before deciding whether a further increase is necessary. Hence I expect Bank Rate to remain unchanged in June, and probably July, with August being the next crunch month when we might get another increase.

However, by then the signs that the medicine the MPC has already doled out are working, particularly in relation to the housing market, are likely to be much more obvious than they are today. There are already very clear indications that the three Bank Rate increases between August and January are now impacting on the housing market, although one needs to be careful interpreting the figures because of distortions caused by some people putting their property on the market earlier than they would otherwise done, sometimes at an inflated price, to avoid wasting money on a HIP. Now that the Government has been forced into at least a partial reality check and deferred the earliest start date for some HIPs to 1 August these distortions could well continue for a few months.

However, the most important statistics in assessing the strength of the housing market are (1) new mortgage approvals and (2) actual lending for purchases. These are now on a downward trend and are not significantly affected by the HIPs fiasco. I will examine these figures in detail tomorrow.

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